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• Will Opportunity Zones Benefit Marginalized Communities?

December 19 2018
December 19 2018

In 2017, Congress passed comprehensive tax reform, and nestled in that complex document was an intriguing program: Opportunity Zones. The program aims to channel investments into the country’s neediest communities. Unfortunately, details about how Opportunity Zones will work have been thin on the ground, fueling some concern as the program’s 2019 launch date draws near.

Confluence partnered with Sustainable Agriculture & Food Systems Funders (SAFSF), to bring together a panel of experts who could shed light on the new legislation. We were staggered by member interest: The online event attracted over 200 participants, proving that investors are eager to understand and strategize around this new program.

Moderator Kevin (Kirby) Irby of Threadspan raised pressing questions in his introduction. “Who,” he asked, “will Opportunity Zones actually benefit? Are these funds just a tax evasion for the wealthy? A goad to gentrification?” Despite the possible threats, Kirby recommended taking a position of optimism tempered by “a healthy dose of reality.”

He then introduced Amy Laughlin, vice president of the Low Income Investment Fund (LIIF), who provided a high-level overview of what Opportunity Zones are and how they work.

Opportunity Zones 101: A History

In the years after the 2008 recession the U.S. showed meaningful signs of economic recovery. But in 2015 the Economic Innovation Group (EIG) found that the gains were uneven: deep pockets of unemployment lingered, and it was clear the some communities were being left behind.

EIG felt that it was time to craft policy to facilitate the flow of capital into these struggling communities. Though the government has enacted similar policies for years, the results have been mixed at best: Programs are typically underutilized, hampered by limited incentives, complicated requirements, and seemingly arbitrary investment caps.

Opportunity Zones were designed to incentivize taxpayers to liquidate capital assets and invest them in qualified low-income communities. In return, investors receive relief from capital gains taxes. Investors receive three layers of tax benefits:

  1. Deferral. If capital gains are invested in an opportunity zone, taxes are deferred until the year 2026.

  2. Reduction. If an investor keeps the funds in the community for five years, they’ll see a 10% reduction in the amount taxed. For an investor who keeps the funds in the community for seven years, they will see a 15% reduction in the amount taxed.

  3. Exemption. The last layer of tax benefit could potentially offer the greatest benefit to both investors and needy communities: A ten-year investment means the investor won’t be taxed at all on the investment.

The program’s framers recognized it was important to provide “patient” capital that could be available for the mid- to long-term. It was also important to reduce barriers to entry for the program. Importantly,  EIG sought to create a scalable program.

Strengths and Challenges of Opportunity Zones

The Opportunity Zones program’s strength – a lack of limits on investment and the types of assets investors can finance – may also prove to be its weakness. Observers are concerned that the lack of rules could open the door to potential abuse.

According to Laughlin, there’s currently no way to ensure that funds are invested in high-impact, high-value projects that benefit a community. This could lead to displacement and/or gentrification, which is not consistent – to put it mildly – with the intent of the program.

Laughlin has two pieces of advice for potential investors looking for responsible ways to get involved:

  1. If you have capital gains to invest, seek out mission-driven developers.

  2. Look to community-based projects for sound investments – projects such as educational facilities and affordable housing.

March Gallagher, president and CEO of Community Foundations of the Hudson Valley, agreed with Laughlin about the need for guardrails, and she also emphasized the size of the opportunity. She quoted Darren Walker,  Ford Foundation, “This Opportunity Zones Program is the biggest economic development initiative in 50 years.”

As someone who’s spent a lot of time in economic development, however, Gallagher has seen the many ways programs can fall short of their goals. She’s concerned that the program may not build wealth where its most needed, and she shared mitigatory recommendations.

  • Get a map of the Opportunity Zones in your area. “I cannot overstate how important this is,” said Gallagher. Opportunity 360 has maps, as well as data attached to those maps.

  • Educate your municipalities. Share every resource you can, and start the conversation now about creating program guardrails.

  • Let donors know about the program. “If a donor can avoid taxes, that’s more money for charity,” says Gallagher.

  • Encourage NGOs to leverage these funds. Nonprofits working in housing are just beginning to realize they must pay attention to this program; foundations can help start that conversation and share resources.

  • Convene conversations about local investment. “What would a shared set of principles on local investment look like? This has been a sticky subject, “says Gallagher; “Opportunity Zones give us a chance to refresh the conversation.”

Gallagher did sound some notes of caution. “Money is going to pool in these funds,” she said, “and deploying that money is going to be very difficult.” Gentrification, furthermore, is a very real threat.

As a means of forestalling displacement, she suggests philanthropists might step in and buy properties ahead of time, to ensure a stock of affordable housing survives in case there’s a wave of gentrification.

Cities can use the funds to renovate and convert properties into affordable housing. Housing stock in the Opportunity Zones has an average age of 50 years; renovating these buildings would address multiple issues at once, fixing lingering lead contamination, which impacts both education and crime, while creating a new stock of safe affordable housing.

Job creation, says Gallagher, should not be the primary goal – or a metric for success in a humming economy. “People are already working two are three jobs,” she said. “They don’t need more work.” Instead, Gallagher says, investors should focus on creating affordable housing, improving wages, and increasing ownership.

For impact investors, the ultimate goal is to create wealth and keep it in the community. Gallagher suggests that funders and investors should take a closer look at supporting ownership models such as ESOPs and employee-owned cooperatives.

Opportunity Zones on tribal lands

Attorney Heather Dawn Thompson, Lead Manager of Tribal Opportunity Zones Venture Group and a member of the Cheyenne River Sioux tribe, spoke to another often-overlooked investment opportunity: tribal lands.

“Native communities,” Thompson said, “have some of the highest poverty and unemployment rates in the nation.” The need is great, but capital is hard to come by. She says there’s an entire pipeline of projects created by local communities that are starved for capital. But she posits there’s a “psychological impediment” to investing in Indian country.

Thompson has some clients who are paying 23% for capital, and 8-12% are common interest rates. “People will invest in Bangladesh but not on a reservation in the U.S.,” she said. “We need to help investors feel comfortable with investments in Indian country.”

She created a venture group, Native American Capital, to develop projects in Indian country with Opportunity Zone investors. The projects are as diverse as the tribe’s needs, ranging from buffalo ranching to self-sustaining developments, and from wind and solar projects to Denny’s restaurants. Add in the additional incentives for doing business on reservations, and investing there begins to look pretty good.

Grantmakers also have an important role to play in Indian country, Thompson says. Often, a single impediment can prohibit a project from penciling out. If a grantor steps in to help with the impediment – providing fencing for a buffalo ranch, say, or subsidizing workers comp for fire jumpers – it can make a project competitive.

While investors, foundations and fund managers await further regulations, one thing is clear – the Opportunity Zones program is moving forward, and anyone interested in equitable development better start paying attention now to ensure this program bring positive rather than unwanted change.

 

Are you a Confluence Member working through Opportunity Zones? Don’t forget to share your insights and resources through the Confluence Listserve or share your experiences with a program staff member.


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